Euro's glass remains half-empty

Ten years ago this month, the leaders of the European Union named the 11 countries that would merge their currencies into a single unit as a step toward transforming the region's political and economic tapestry.

So has the euro really lived up to expectations? The EU certainly thinks so.

"Ten years into its existence, the euro is a resounding success," it said last week.

And yet, any reckoning of the balance sheet is a lot more complex than that. The euro has certainly been a brilliant technical achievement: The currency is strong and stable, supported by international investors, and a reliable store of value, with little inflation to worry about.

On the other hand, it has made little difference in the areas where it was meant to. There has been no real change in the productivity of the euro-area economy. Nor does it look like political union is much closer.

While it's possible to describe the euro's cup as half-full, it's just as valid to look at it as half-empty.

"It is only now that aspects of the economy are going sour, and we'll have to see how the euro copes with that," says Jonathan Loynes, chief European economist at Capital Economics Ltd in London.

Looking back, both sides of the often-vicious debate over the euro were guilty of exaggeration. Certainly the apocalyptic warnings of the anti-euro camp were way over the top. The currency hasn't collapsed. Industries haven't been wiped out. There is no hyperinflation. Germans aren't rioting over having to pay off Italian debts.

Of course, there has been a booming global economy in the past 10 years. That has made the introduction of the new currency a lot easier. If the credit crunch, or some other event, causes a serious economic decline, nobody knows how the euro will react.

If the Spanish property market collapses, for example, we'll have to see what happens when people are told there is nothing that can be done about it because all the monetary decisions are made in Frankfurt, not Madrid. That aside, the launch of the euro has been a technocratic triumph.

The harder question is whether it has done any good.

"It has fallen short of some initial expectations," the EU said. That, surely, is putting it mildly.

One aim of the euro was to improve the performance of the euro area's economies. Nations such as Ireland and Spain have boomed, fueled partly by cheap money. Interest rates set in Dublin or Madrid would have been far higher than those of the European Central Bank.

Germany has transformed itself and done quite well. France and Italy have struggled. It is hard to believe that isn't roughly what would have happened if they had stuck with the deutsche mark, franc and lira.

Jobs have been created under the euro. Unemployment is significantly lower across much of the region. Again, though, that may have happened anyway as labor markets were gradually liberalized. It is hard to see that the euro helped much.

Other measures have been less impressive. Productivity growth has dropped from an annual average rate of 1.5 percent in the 1990s to only 1 percent this decade. Long-term, without higher productivity, you won't get any richer. Per-capita income in the euro area was about 70 percent of the US level when the euro was introduced. It's the same today. That's hardly the transformation the creators of the euro were looking for.

Nor can it be described as a decisive move toward political union. Countries that stayed out of the euro, such as the UK, show no sign of joining. What was meant to be a temporary delay has turned into a permanent split, creating a two-tier union. That wasn't part of the original plan. The collapse of the proposed constitution suggests the euro was the high tide of European integration, not a stepping stone.

The debate has moved on. The issues that concern people now are climate change, the impact of globalization and rapidly aging populations. The euro isn't really part of those debates - and it doesn't look like part of the solution, either.

The euro looks increasingly like the Concorde, the Anglo-French supersonic aircraft that was a symbol of closer European cooperation. It, too, was a triumph of brilliant engineering.

Yet by the time it hit the market, the world had changed. Likewise the world has moved on from the euro. It works, but it hasn't solved any of the euro area's problems.

Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.

(China Daily 05/15/2008 page17)